California IOUs

California

California started issuing IOUs instead of checks. I know some people that got an IOU instead of their tax refund. They are not alone. In the last week, State Controller John Chiang’s office issued 91,000 IOUs worth $354 million to people expecting tax refunds, to state vendors and to local governments.

Banks have been willing to accept the IOUs and redeem them for cash. However, some major banks are getting ready to stop cashing them, although credit unions appear to be willing to continue redeeming the IOUs.

Since an IOU doesn’t work for anyone who needs cash, markets have opened for buying and selling these IOUs. There have been some sitings on eBay and Craigslist. It looks like eBay has been vigilant about pulling down listings. Craigslist has dozens of listings.

It should be so surprise that the IOUs are securities and subject to securities laws. The SEC has issued an Investor Alert on State of California IOUs.

While the IOUs are “securities” for purposes of the federal securities laws, as obligations of the State of California they are “municipal securities.” This means that sales of the IOUs are not required to be registered with the Commission. Also, as municipal securities, the IOUs are subject to the rules issued by the Municipal Securities Rulemaking Board, which include a requirement that the securities sold are suitable for the purchaser.

In addition, persons engaged in the business of buying and selling the IOUs may need to be registered as market intermediaries, such as brokers, dealers, or municipal securities dealers, alternative trading systems, or national securities exchanges.

Meanwhile, California’s bind debt rating has been lower to BBB from A minus, with another downgrade to junk status possible next week.

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